If your business sends invoices to other businesses, you know the gap. The work is done, the customer is happy, and payment is due in 30, 60 or even 90 days. Payroll, fuel, materials and rent do not wait. For many North Carolina companies, that gap between finishing the work and getting paid is a familiar cash flow challenge.

Invoice factoring is one of the tools businesses use to deal with it. This guide is for general education. It explains what factoring is, how it typically works, and the points owners usually look at in the fine print.

What invoice factoring is

Invoice factoring is an arrangement in which a business sells its unpaid business-to-business invoices to a third party, called a factor, at a discount. Instead of waiting for the customer to pay, the business receives a portion of the invoice value up front. The factor then collects payment from the customer and passes along the remaining balance, less its fees.

Factoring is generally described as different from a traditional loan. The business is selling an asset, its receivables, rather than borrowing against its general credit. That is why a factor typically looks closely at the customer's ability to pay.

How the process usually works

1. Work is delivered and an invoice is issued. Factoring generally applies to invoices for completed work owed by commercial or government customers.

2. The invoice is submitted to the factor. The factor reviews it and may check the customer's payment history.

3. An advance is paid. This is a percentage of the invoice value. The exact percentage varies by factor and industry.

4. The customer pays the factor. Payment typically follows the instructions on the invoice and the customer's normal terms.

5. The reserve is released. After the invoice is paid, the remaining balance is sent to the business, minus the factor's fees.

What affects the cost

There is no single standard price, and the headline number is rarely the whole story. Factoring agreements commonly include some mix of:

• A discount or factoring fee, often expressed as a percentage of the invoice over a time period, and sometimes rising the longer an invoice stays unpaid.

• An advance rate, which determines how much cash is paid up front.

• Other charges, such as setup or application fees, monthly minimums, bank transfer fees, or early termination fees.

Because structures differ, two agreements with the same quoted rate can have very different total costs. Business owners are often advised to review the full fee schedule in writing before agreeing to anything.

Recourse and non-recourse

This is one of the most important terms in a factoring agreement.

• Recourse factoring means that if the customer does not pay, the business may be required to buy the invoice back or replace it. It is more common and often carries lower fees.

• Non-recourse factoring generally shifts some of the risk of customer non-payment to the factor. It often costs more and usually comes with conditions, and in many agreements it covers a customer's insolvency rather than a dispute over the work. The contract language matters.

Which businesses commonly use factoring

Factoring is typically used by businesses that invoice other businesses or government agencies and have long payment terms, such as:

• Staffing and temporary labor companies

• Trucking, freight and logistics companies

• Manufacturers and suppliers

• Wholesalers and distributors

• Contractors and service providers

It is generally not designed for businesses paid at the point of sale by individual consumers, and it may be a poor fit when customers have weak payment histories.

Questions business owners commonly ask before signing

• What is the advance rate, and what is the total cost on a sample invoice?

• Are there setup, minimum volume, or termination fees?

• Is the agreement recourse or non-recourse, and what exactly is covered?

• Must every invoice be factored, or can invoices be chosen individually?

• Will customers be contacted, and how?

• How long is the contract, and how does it end?

• Does the factor file a lien on receivables (a UCC filing), and how could that affect other financing?

Other ways businesses manage cash flow gaps

Factoring is not the only approach. Some businesses use a line of credit, short-term working capital financing, tighter payment terms, early-payment discounts for customers, or deposits and milestone billing. Each has different costs and tradeoffs, and the right fit depends on the business's finances and the size of the gap.

A note on North Carolina

North Carolina has laws and regulations that can apply to certain financing and brokering activities. This article does not address them. Business owners with questions about how those rules apply to a specific agreement should talk to a North Carolina attorney.

This article is for general educational purposes only. It is not an offer, solicitation or advertisement for any financing, factoring or brokerage service, and it is not legal, tax or financial advice. Call 4 Capital is not a lender or factoring company. Terms, fees and availability vary by provider and situation. Please consult your attorney or CPA about your specific circumstances.